Central Bank Communication with the General Public: Survey Evidence from Germany

This paper studies the effect of different types of monetary policy announcements on household inflation expectations based on micro data from a survey of German households. As unique feature, interviews of the survey were conducted both shortly before and after monetary policy events. This timing provides a natural experiment to identify the immediate effects of policy announcements on household inflation expectations. In contrast to most existing studies, the availability of the survey over a period of 15 years also allows me to exploit the time-series dimension to estimate how policy announcements affect household inflation expectations over the medium-term. I find that policy rate announcements lead to quick and significant adjustments in household inflation expectations with the effect peaking after half a year. Announcements about forward guidance and quantitative easing, on the other hand, have only small and delayed effects. My results suggest that monetary policy announcements can influence household expectations but further improvements in communication seem to be necessary to reach the general public more effectively. In particular, in an environment where policy rates are constrained by the effective lower bound, it may be very hard for central banks to influence household expectations.

Uncovering the heterogenous effects of news shocks to underlying inflation

We identify in a SVAR shocks that best explain future movements in different measures of underlying inflation over a five-year horizon and label them as news augmented shocks to underlying inflation. Independently of the measure used, such shocks raise the nominal rate and inflation persistently, while they induce mild and short-lived increases in economic activity. The extracted inflation shocks have differential distributional effects. They increase significantly and persistently the consumption of mortgagors and home owners. Differently from the traditional monetary policy disturbances, news augmented shocks to underlying inflation induce a positive wealth effect for mortgagors and home owners, driven by a reduction in the real mortgage payments and a persistent increase in real house prices that they induce.

Anchoring long-run inflation expectations in a panel of professional forecasters

We use panel data from the US Survey of Professional Forecasters to estimate a model of individual forecaster behavior in an environment where inflation follows a trend-cycle stochastic process. Our model allows us to estimate forecasters’ allocation of attention when learning about long-run inflation and how sensitive their long-run expectations are to incoming inflation and news about future inflation. We use our model of individual forecasters to study average long-run inflation expectations. We find that short term changes in inflation have small effects on average expectations. News about future inflation has larger effects but they are still relatively small. These features of our estimated model provide an explanation for why the anchoring and subsequent de-anchoring of average inflation expectations over the period 1991 to 2020 were long lasting episodes. We use our estimated model to investigate the degree of inflation overshooting necessary to re-anchor average long term inflation expectations going forward from 2021Q3. We find the high inflation readings of mid-2021 must be followed by overshooting generally at the high end of Fed projections to re-anchor average inflation expectations to pre-Great Recession levels.